Bank mergers: the cyclical behaviour of regulation, risk and returns

Abstract

Purpose The purpose of this paper is to examine the effects of bank mergers on systemic and systematic risks on the relative merits of product and market diversification strategies. It also observes determinants of M&A deals criteria, product and market diversification positioning, crisis threshold and other regulatory and market factors. Design/methodology/approach This research examines the impact and association between merger announcements and regulatory reforms at bank and system levels by investigating the impact of various bank consolidation strategies on firms’ risks. We estimate beta(s) as an index of financial institutions’ systematic risk. We then develop an index of the estimated equity value loss as the long-rum marginal expected shortfall (LRMES). LRMES contributes to compute systemic risk (SRISK) contribution of these firms, which is the capital that a firm is expected to need if we have another financial crisis. Findings Large acquiring banks decrease systemic risk contribution in cross-border M&As with a non-bank financial institution, and witness profitability (ROA) gains, supporting geographic diversification stability. Capital requirements, activity restrictions and bank concentration increase systemic risk contribution in national mergers. Bank mergers with investment FIs targets enhance productivity but impair technical efficiency, contrary to bank-real estate deals where technical efficiency change accompanied lower systemic risk contribution. Practical implications Financial institutions are recommended to avoid trapped capital and liquidity by efficiently using local balance sheet and strengthening them via implementing models that clearly set diversification and netting benefits to determine capital reserves and to drive capital efficiency through the clarity on product–activity–geography diversification and focus. This contributes to successful ringfencing, decreases compliance costs and maximises returns and minimises several risks including systemic risk. Social implications Policy implications: the adversative properties of bank mergers in respect of systemic risk require strict and innovative monitoring of bank mergers from the bidding level by both acquirers and targets and regulators and competition supervisory bodies. Moreover, emphasis on regulators/governments intervention and role, as it provides a stabilising factor of the markets and consecutively lower systemic risk even if the systematic idiosyncratic risk contribution was significant. However, such roles have to be well planned and scaled to avoid providing motives for banks to seek too-big-too-fail or too-big-to-discipline status. Originality/value This research contributes to the renewing regulatory debate on banks sustainable structures by examining the risk effect of bank diversification versus focus. The authors aim to address the multidimensional impacts and risks inherent to M&A deals, by examining the extent of the interconnectedness of M&A and its implications within and beyond the banking sector.

Komparasi Kinerja Keuangan PT Bank Syariah Indonesia Tbk Sebelum dan Sesudah Merger

“…Sifat merugikan merger bank sehubungan dengan risiko sistemik memerlukan pemantauan yang ketat dan inovatif terhadap merger bank dari tingkat penawaran oleh pihak pengakuisisi dan target serta regulator dan badan pengawas persaingan. 26 Dengan menggunakan sampel bank-bank yang tercatat di Indonesia Stock Exchange pada periode 2002 sampai 2019, riset Nagara memberikan informasi bahwa variabel risk profile memberi efek positif terhadap merger. Sementara, abnormal return, tata kelola perusahaan yang baik, profitabilitas, dan ekuitas tidak berpengaruh positif terhadap merger.…”

Challenges of Islamic Bank Merger in Indonesia: Bocr Approach

“…Mergers can also improve the welfare of corporate partners (Montgomery & Takahashi, 2020). Besides that, this bank merger will be able to stabilize individual banks and reduce risk (Hassan & Giouvris, 2021). The post merger banks can sustain the market risk exposure from the global financial crisis (Ab-Hamid et al, 2018) However, another opinion was put forward by (Yusuf & Raimi, 2019) that independent banks outperform merged banks.…”

Indonesia Islamic Bank Merger: Stages, Challenges, and Strategies

“…The negative impact of mergers, various studies that have been conducted by Rizal et al (2021) state that the merger of these three state-owned Islamic banks has a difference in value with the negative aspects. According to Hassan and Giouvris (2021) this bank merger will be able to stabilize individual banks and reduce risk. Meanwhile, according to Montgomery and Takahashi (2020) mergers can also improve the welfare of company partners.…”